April 14, 2017 / 8:10 PM / 4 months ago

Fitch Affirms Gabon at 'B+'; Outlook Negative

(The following statement was released by the rating agency) LONDON, April 14 (Fitch) Fitch Ratings has affirmed Gabon's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with a Negative Outlook. The issue ratings on Gabon's senior unsecured foreign-currency bonds have also been affirmed at 'B+'. The Country Ceiling has been affirmed at 'BBB-' and the Short-Term Foreign- and Local-Currency IDRs at 'B'. KEY RATING DRIVERS Gabon's 'B+' Long-Term IDRs reflect the following key rating drivers: Gabon's budget cash deficit widened to 6.6% of GDP in 2016 from 4.1% in 2015. The deterioration mostly reflects the decrease in oil revenues, stemming from the 4% fall in oil production and lower oil prices in 2016. We expect the cash deficit to be about 4% of GDP in 2017 as oil prices recover and capital expenditure stays around 22% of total spending. Capex has been stable since 2015 when investment spending was cut drastically in response to falling oil receipts. Fitch views public finance management as a weakness. The government is continuing to accumulate arrears and we believe this reflects growing financing and liquidity constraints as a result of the oil revenue shortfall. Arrears to suppliers were estimated at XAF201 billion in February 2016 (2.4% of GDP) and probably increased further during the year, before declining in early 2017. Fiscal buffers have eroded substantially on the back of widening financing needs with government deposits at the central bank and commercial banks decreasing from USD1.3 billion in 2015 (9.4% of GDP) to USD834 million in December 2016 (6.2% of GDP). However, we expect that the EUR500 million budget support approved by the African Development Bank in January for 2016-2017 will help contain a further decline in deposits. Fitch also expects that discussions initiated with the IMF in February will lead to a financial support programme, although this is not certain. IMF loans are likely to ease growing financing pressures and IMF monitoring will encourage some moderate reforms. However, implementation risk is high as it will prove difficult for the government to implement substantial fiscal tightening in the face of weak growth and possible resurgence of social unrest. Fitch believes general government gross debt will rise to about 50% of GDP in 2017 and to 51% in 2018, below the 'B' category median of 57% of GDP. Debt service is set to rise in 2017, boosted by the final payment of USD190 million on the 2007 Eurobond due this year. The rise in commercial debt has led to a surge in the government interest burden, which we forecast at 10.8% of government revenues in 2017 and 9.8% in 2018 (against a B median of 9.6% in 2016). The sharp fall in fiscal receipts due to low oil prices in 2015-2016 has severely hit the banking sector through banks' exposure to contractors executing public projects. Non-performing loans increased to 9.7% of total loans at end-2016 from 8.1% in 2014 and we believe it will keep rising as arrears accumulation of the government to suppliers continues to depress asset quality. Three public banks, Poste Bank, Banque Gabonaise de Developpement and Banque de l'Habitat, have been under provisional administration for more than a year and might need recapitalisation. Sharp cuts in public investments have dampened growth in the non-oil sector and oil production has started to decline due to maturing oil fields. We project the Gabonese economy will grow 2.4% in 2017 as large agri-business projects start to unfold and help offset the continued contraction in the oil sector. Growth should accelerate in 2018 to 3.6% as confidence improves, financing constraints ease and public investment is re-launched. Fitch estimates that Gabon's current account deficit deteriorated further to 5.6% of GDP in 2016 from our estimate of 2.4% in 2015 on the back of weak performance of oil and non-oil exports including timber and manganese. Recovering oil prices will likely support a narrowing of the current account deficit in 2017-2018 to a projected average of 3.6% while moderately higher oil revenues, increased recourse to external borrowing by the sovereign and ongoing net FDI inflows of 5% of GDP will help stabilise reserves. Gabon's international reserves have decreased drastically to USD780 million in 2016 (or 1.4 months of import cover) from USD1.8 billion in December 2015 (or 3.3 months of imports cover). This reflects a widening current account deficit and rising debt service payments. The gross external financing requirement is therefore projected to surge to 145% of official reserves in 2017, from 64.2% in 2016 and 34% in 2015. However, we believe IMF funding will help meet upcoming external financing needs. Gabon's ratings are constrained by weak data quality and standards of governance. Gabon ranks 164th out of 190 in the 2017 World Bank "Ease of Doing Business" indicator. The ratings are supported by a high GDP per capita relative to peers and a stable macroeconomic environment, backed by membership in the franc zone of the Central African Economic and Monetary Community. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Gabon a score equivalent to a rating of 'B+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES Future developments that could individually, or collectively, result in a downgrade include: - Failure to secure external financing in the short term and address liquidity constraints. - Further decline in fiscal buffers and international reserves or heightened signs of financing pressures. - Deterioration in the fiscal balance and increase in general government debt to GDP ratio. - Political instability, particularly if it were to have an adverse impact on the economy. - Rising current account deficit and net external indebtedness. Future developments that could individually, or collectively, result in the Outlook being revised to Stable include: - Reduction in the budget deficit consistent with a stabilisation of the general government debt/ GDP ratio. - Stabilisation of deposits at the central bank and of the stabilisation fund, which would improve the sovereign's resilience to oil price volatility. - Successful diversification of the economy and fiscal revenues away from oil. KEY ASSUMPTIONS Fitch assumes a gradual reduction in Gabonese oil output over the medium to long term. Fitch assumes that oil price (Brent) will average USD52.5 per barrel in 2017 and USD55 per barrel in 2018. Fitch assumes no break-up of the CEMAC monetary zone in the foreseeable future, and no devaluation of the exchange rate against the euro. Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonade London E14 5GN Secondary Analyst Arnaud Louis Director +33 1 44 29 91 42 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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